The year is 1946. The world is reeling from the after effects of World War 2. The economy is in a state of flux and there is uncertainty in the air. Nobody quite knows where humanity is heading and it is during this time, a young Canadian designer, D.C Simpson sets out to make his name in the world of design thinking. It would take him some time to perfect his design, but when he is done, he will have designed the first modern plastic chair. It would take another 25 years for companies to truly mass produce plastic chairs, but for better or for worse D.C. Simpson will have the changed the world forever.

AN INTRODUCTION TO AVON MODPLAST

Today plastic chairs are everywhere and our company Avon Moldplast Limited is engaged in the manufacturing of plastic furniture under the brand name Avon.

Unfortunately, for our company, Avon also happens to be a trademarked property of Avon cycles and Avon Cycles isn’t particularly happy about this. They have since filed a plea requesting for the rectification/revocation/cancellation/confining of the aforementioned trademark. In any case, if the company’s promoters cannot hold on to the trademark it is likely to affect business operations going ahead.

BUSINESS OPERATIONS

Speaking of business operations, what is it that the company actually does? As of today, the company buys its raw materials from a petrochemical company, mixes and processes the raw materials, heats it to the required temperature and injects it into predesigned moulds. Once the plastic cools, they take it out, tag their brand name and send them out to their distributors.

Now, the moulds used to make the plastic furniture are rather expensive. But if you wanted to introduce new designs into the market, you must have new moulds. The company is raising about 4.5 Crores and is planning to spend about 2 Crores in buying new moulds. The rest, on working capital and general corporate purposes.

ARE THEY INCREASING PRODUCTION CAPACITY?

Does buying new moulds mean the company can increase production now? We don’t think so. If they wanted to increase capacity they need machines that can process and inject the pre-mix into these moulds. Buying new moulds does not necessarily increase capacity. Now the reason why we mention any of this is because the company was already operating at 81% of its capacity during the year FY 2016-2017. So has the company stagnated since considering its already operating at near maximum capacity?

A GROWING TOPLINE

The company’s revenue has in fact grown from 13 Crores to about 18 Crores as of Jan 2018 and it has been growing for the past few years. So how are they still increasing their top line when they are already working at near peak capacity?

Well, Avon Furniture outsources some of its manufacturing to another company called Bonita Furniture Pvt. Limited. Although, Bonita is still owned by the promoters and members related to the Promoter Family it is quite possible that Bonita has helped the company in scaling production as the company sold almost 2.6 Crores worth of furniture to Avon during FY 2018 (Up to Jan).

Despite increasing their top line, the company’s margins don’t look all that attractive until you see the results for FY 18. Profits jump from 10 lakhs (FY 2017) to 70 lakhs (Upto Jan FY 2018) and suddenly the margins (3.3%) are almost in line with other industry peers. Quite interesting that.

What’s also interesting is the promoters remuneration. Directors Sushil Aggarwal and his son Sahil Aggarwal are in for big pay raises.

That means for the next financial year; they are in line to receive 42 Lakhs. Remember that their profits up to Jan FY 18 was 70 Lakhs.

SO, WHAT DOES FUTURE HOLD FOR AVON?

The promoters look like they do have a plan. They have increased their top line consistently and despite thin margins, the company does not seem to have major problems with their financial numbers.

What is perhaps slightly concerning is the asking price. Based on the annualized earnings, the company is listing itself at a P/E of around 20. Industry average is at 27, but most of their peers are well established and operate at much larger scales. So, yeah, Avon doesn’t exactly come cheap.

However, we here at Finception wish the company all the best in their future endeavor and we hope that the company grows to new heights.

No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.